Small businesses struggling to find funding have turned to alternative options such as merchant cash advances in recent years. Such deals have threatened the existence of some of these mom-and-pop operations, WSJ Pro Bankruptcy reported. More than 100 businesses that filed for chapter 11 since the start of 2023 have attributed their bankruptcies at least partly to cash advances, up from at least 68 for 2022 and 16 for 2021, according to a Wall Street Journal review of court records. A Brooklyn clam bar visited by celebrity chef Anthony Bourdain, Brooklyn retail chain Showfields, known for showcasing local vendors and artists, and, last week, Florida-based countertop maker International Granite & Stone are among those restructuring in chapter 11. These merchant cash financiers, estimated to be about 100 participants, provided $19 billion in 2019, up from $8.6 billion in 2014, according to estimates in a 2023 report published by the U.S. Consumer Financial Protection Bureau. The growth has prompted the CFPB to try to tighten regulation on the industry, leading the cash providers to fight back in a lawsuit against the regulator. Since the COVID-19 pandemic government financial aid dried up, some companies have sought capital from financiers that provided a lump sum, in exchange for a share of future revenues of the businesses, plus fees. To get repaid, the cash providers can make regular, including daily, withdrawals from businesses’ bank accounts. The popular financing comes at a cost. A 2019 Federal Reserve report said the equivalent annual percentage rates for cash advances can exceed 80% or “even rise to triple digits.” “We frequently see this…that in the last days before a bankruptcy filing, a company got in over its head with these merchant cash advances,” said Bankruptcy Judge Stacey Jernigan during a recent American Bankruptcy Institute event. “They very often seem to be the ones that caused the bankruptcy,” Judge Jernigan said, describing the financing as “pricey” or even “onerous.”
